Ashburton has always had a very international perspective. This is partly to do with opportunity and partly to do with risk. It is highly unlikely that all the best investments will be conveniently located in one place and hence we have to cast our net far and wide to find the best opportunities. Equally, we don't want to put all of our eggs in one basket and spreading our investments across a range of countries is an integral part of the risk control process.

However, investing internationally introduces an extra layer of risk to any portfolio. If a sterling-based portfolio invests in the UK equity market, the risk is that share prices will fall. If a sterling-based portfolio invests in the US equity market, there are two layers of risk: that share prices fall and the value of the dollar falls versus the pound.

We are able to manage this latter type of risk through judicious use of currency 'hedges'. This process involves the sale of an equal amount of a currency to balance the foreign currency exposure created by the purchase of a foreign bond or equity. For example, if a sterling-based portfolio owns $40,000 worth of US bonds and the expectation is that the dollar will weaken versus the pound, we might sell $40,000 versus the pound for delivery in one month's time. If the dollar then falls, the profit on the hedge will offset the currency loss on the US bond position. By the same token, if the dollar strengthens, the loss on the hedge will offset the currency profit on the US bond position. In other words, the currency hedge removes the portfolio's exposure to the dollar. Every month, the 'hedge' will be rolled until the point when the view on the dollar changes.

The Cash & Fixed Income and Asset Management Services have a restriction whereby there can be no more than 50% exposed to foreign currencies. Given that both of these services are typically more than 50% invested in foreign markets, there will normally be some of the portfolio that must be currency hedged. On many occasions we have actually decided to remove all exposure to foreign currencies.

This currency overlay approach enables us to separate the asset allocation process into two tiers. In the first, we decide which international assets we want to invest in and in the second, we decide how much of the resulting foreign currency exposure we want to retain. This can be particularly useful when there is an asset that we do like, that is denominated in a currency that we don't like.